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10.6 The Government’s Decision

Learning Objective

  1. Learn how the lobbying and tariff revenue implications of a tariff affect the decision of the government.

How the government decides whether to offer the $5 tariff, and who decides, will depend on the procedural rules of the democratic country in question. The tariff might be determined as a part of an administered procedure, such as a safeguards action or an antidumping action. Or the tariff may be determined as a part of a bill to be voted on by the legislature and approved, or not, by the executive. Rather than speaking about a particular type of government action, however, we shall consider the motivations of the government more generically.

The first thing the government may notice when being petitioned to consider raising the tariff is that government revenues will rise by $5 million. Relative to many government budgets, this is a small amount, and so it may have very little influence on policymakers’ decision. However, it will help reduce a budget deficit or add to the monies available for spending on government programs. Thus it could have a small influence.

In a democratic society, governments are called on to take actions that are in the interests of their constituents. If government officials, in this example, merely listen to their constituents, one thing should be obvious. The arguments of the industry seeking protection will surely resonate quite loudly, while the arguments of the consumers who should be opposed to the tariff will hardly even be heard. If a government official bases his or her decision solely on the “loudness” of the constituents’ voices, then clearly he or she would vote for the tariff. This is despite the fact that the overall cost of the tariff to consumers outweighs the benefits to the industry and the government combined.

Notice that the decision to favor the tariff need not be based on anything underhanded or illegal on the part of the industry lobbyists. Bribes need not be given to secure votes. Nor does the industry lobby need to provide false or misleading information. Indeed, the lobby group could provide flawlessly accurate information and still win the support of the officials. Here’s why.

It would be natural for the industry lobby group to emphasize a number of things. First, jobs would be saved (or created) as a result of the tariff. If a number can be attached, it will be. For example, suppose the industry supported 25,000 jobs in the initial equilibrium, when eight million pairs of jeans were produced by the domestic industry. That averages to 320 jeans produced per worker. Thus, when the industry cuts production by two million units, it amounts to 6,250 jobs. The lobby group could then frequently state the “fact” that the tariff will create 6,250 jobs. Second, the lobby would emphasize how the tariff would restore the vitality of the industry. If a surge of imports contributed to the problem, then the lobby would undoubtedly blame foreign firms for taking jobs away from hardworking domestic citizens. Finally, the lobby would emphasize the positive government budget effects as a result of the tariff revenue. All of this information clearly would be quite true.

If the lobby mentioned the higher prices that would result from the tariff, surely it would argue it is a small price to pay to save so many jobs. The lobby might even convince consumers of blue jeans that it is worth paying extra for jeans because it will save domestic jobs. After all, perhaps their own jobs will one day be in jeopardy due to imports. Plus, it is such a small price to pay: at only $5 extra, no one will even notice!

For a politician facing potential reelection, there is another reason to support the industry over the consumers, even with full information about the effects. Support of the industry will probably generate more future votes. Here’s why.

First, since industry members—management and workers—have a bigger stake in the outcome, they will be more likely to remember the politician’s support (or lack of support) on this issue at election time. Second, the politician can use his support for the industry in his political ads. Consider this political ad if he supports the industry: “I passed legislation that created over six thousand jobs!” Compare it with this truthful ad if he doesn’t support the industry: “By opposing protectionist legislation, I saved you five bucks on blue jeans!” Which one do you think sounds better?

Key Takeaway

  • If representatives in a democracy base policy choices on the interests of their constituents and if industry lobbyists are more organized and “vocal” in their demands than consumers, then governments will more likely choose policies like tariffs.

Exercise

  1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. Of consumer voices or producer voices, these are more likely to be heard by government officials in a representative democracy.
    2. Of consumer interests or producer interests, governments in representative democracies are more likely to implement policies favoring these.